'Tis the season for tax savings 12-09-98

PamMacLean

} Taxing Times 'Tis the season for tax planning By Pam MacLean, CBS MarketWatch Last Update:

SAN FRANCISCO (CBS.MW) -- It's end of the year crunch time, and we're not talking about the holiday gift race. We're talking tax savings.

This is the gift you give yourself by doing a little planning, even in the last weeks of the year. With the market gyrations this year it might be good to put aside the egg nog one night to figure out where you stand with the IRS.

Usually end-of-year planning centers on ways to lower your total taxable income. One of the few ways left in the marketplace is look at your capital gains to be sure you get the most profit for the least amount of tax.

This year the IRS eliminated the three-tier tax rate on capital gains that tied the Schedule D in knots last year. Taxes are back to the basic long-term or short-term tax rates on capital gain.

Assets held more than 12 months are considered long-term holdings and are taxed at a maximum rate of 20 percent. Assets held for less than 12 months are taxed at your ordinary income rate, which may be as high as 39.6 percent depending on your personal situation. So if you plan to sell some winning stocks before the end of the year, lean toward selling those held longer than 12 months so you take advantage of the lower tax rate.

Lower tax for losers

Although you shouldn't sell stocks for tax reasons only, if you have poor performers you want to purge from your portfolio, another way to reduce your capital gains is to sell the loser before January.

You can use stock losses to offset capital gains from stock sales and ultimately up to $3,000 of ordinary income in one year. In considering taxes, you'd generally want to sell short-term losses first to offset gains taxed at the more expensive rate. Next, your losses would offset long-term gains, and then ordinary income up to $3,000.

If you hold securities that became worthless during the tax year, they are treated as though they were sold on the last day of the tax year. To figure whether your capital loss is long-term or short-term on a worthless security, the IRS considers you to have held the securities until the last day of the year in which they became worthless.

There are several tax sites that talk about capital gains, including Fairmark Press and IRS Publication 550. If you want to add more tax sensitive investments next year, many mutual fund and brokerage sites can help. T. Rowe Price has tax models and a calculator, for example.

Bonuses & year-end savings

If you're expecting a year-end bonus check, you are generally not taxed until your boss actually pays the bonus. So, if you believe your income will be lower next year, ask your boss to date the check in January. That way you can avoid paying tax on the income in 1998.

There are a few other ways to save taxes at the end of the year. These include paying off medical bills, making donations or paying property tax bills before January. All are deductible, although medical expenses have a high minimum threshold. You also might consider making an early mortgage payment so you have additional mortgage interest to deduct.

But always keep in mind what this will do to your tax situation next year.

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